By Shahid Sattar | Asim Riaz

Pakistan has been facing a host of challenges that have seriously impacted its development, growth, economic progress and political stability. Inconsistent policies, cross subsidization, resource misallocation, underperforming agriculture, unemployment, untapped female workforce, and rising energy prices are pressing concerns for Pakistan’s Industry.

Often, hasty decisions aimed at addressing immediate issues neglect broader, holistic strategies, leading to short-sighted decisions that hinder the country’s economic growth. Long-term stability of Pakistan depends upon resolving fundamental economic issues. In this context, it is important to recognize the criticality of facilitating the export industries which result in net inflow of dollars and foster economic stability.

 

Globally, there exists a 99% correlation between energy and GDP, with materials demonstrating an absolute 100% correlation to economic output.

It is pertinent to mention that primary objective of State is survival and when faced with substantial fiscal and current account shortfalls, the industrial sector’s paramount importance becomes evident, as these deficits represent an existential threat to the nation. Pakistan has a low literacy rate, suboptimal agricultural yield and limited female participation in the workforce, stemming from deeply ingrained gender norms. Overcoming these issues necessitates long-term strategies.

Hence, this article primarily focuses on ‘energy’ as one of the main challenges affecting Pakistan’s export sector as it can be addressed swiftly.

Concerns over the reliability of vital energy sources have shaped public opinions and political agendas, eventually affecting broader security issues ranging from risks of armed conflicts to the viability, integrity and stability of political systems and national economies. In 2021, the Global Primary Energy Supply was 584 Exajoules (EJ), equivalent to about 100 billion barrels of Oil or 281 million barrels of oil per day (mbpd) out of which 100 mbpd from oil, 65 mbpd from gas, and 75 mbpd from coal, totaling 240 mbpd from fossil fuels whereas Wind and Solar only provide 5.5 mbpd.

 

To grasp the gravity of our energy dependence, consider that a barrel of oil, currently priced at ninety dollars in the open market, equates to roughly 5 years of human labor. Global economic framework relies on an annual consumption of 100 billion barrel-equivalents of coal, oil, and natural gas, effectively introducing an additional 500 billion units of labor into our human system, complementing about five billion real human workers.

The economy, as measured by global GDP, increased exponentially in fossil-fuel era levels to a staggering $105 trillion today. Accordingly, industrialized European nations have taken proactive measures to shield firms from surging energy prices and becoming uncompetitive, over EUR 600 billion between 2021-23, according to Bruegel (Sgaravatti et al., 2023).

Energy shifts human work to machines increasing productivity of a Nation. While this intricate relationship remains largely overlooked in Pakistan, with domestic consumers historically receiving top priority in allocation of resources such as Indigenous Gas. This approach, while aiming to provide affordable energy to households, has led to industrial consumers subsidizing domestic sector.

Pakistan has historically favored prioritizing the household sector which consumes over 50% of the total electricity/gas in last 5 years; a consumptive demand with no contribution to economic growth and it is being cross-subsidized in two tiers. First, capacity payments, which have increased due to cooling load in component-wise tariff while industrial consumer demand is almost flat and could be met with limited installed capacity.

 

Second, unjustified cross subsidies incorporated in the Industrial Tariff to cross-subsidize household cooling load encourages non-economic consumptive load and inefficient use and allocation of energy resources.

The power sector in Pakistan is host to multifaceted and apparently insurmountable inefficiencies, including transmission, distribution losses, financial burden from Independent Power Producers’ (IPPs’) idle capacity payments(in FY 2021-22, out of 30.3 GW base load thermal power plants, 54% remain unutilised – Nepra). Capacity payment was only Rs 2 per kWh in FY 2013-14 to Rs 17 per kWh in FY 2023-24 before rebasing while base load remained 7-8 GW.

With industrial base load of about 8 GW at present large seasonal and intra-day variations in grid electricity makes capacity surpluses very expensive. NTDC supplied 25.5 GW at mid-night on August 21, 2023, which implies about 21 GW to supply seasonal ventilation and ACs load (Cooling load) as reserve margin would be required for reliability of supply. Average generation cost per MW in a power system is around USD 2.5 million per MW.

 

The associated T&D infrastructure cost is about USD 1.5 million per MW, which makes it total CAPEX USD 4 million per MW. Hence, 21,000 X 4 = USD 84 billion CAPEX was required to serve 17,500 MW additional cooling demand which has a very low utilization factor of 30%. To tackle these issues, proposed solutions involve reducing losses, restructuring debt, lowering industrial tariffs, improving transmission, optimizing capacity usage in winter months, and transitioning to local Thar coal for certain projects.

Nonetheless, achieving a sustainable, durable and effective economic outlook requires a fundamental shift in management and strategic thinking of the energy sector.

There is lack of transparency in gas pricing mechanisms, political reluctance to implement reforms; and regulatory weaknesses have resulted in revenue, gas development surcharge shortfalls and a substantial circular debt problem in the gas sector.

Consumption in households exceeds 1 billion cubic feet per day (bcfd) in both Suis when considering high Unaccounted-for Gas (UFG) in the feeder main of Gas Utilities. Domestic consumption in the SNGPL System Gas consumes staggering 61% of the annual intake at under $1.5/MMBtu, requiring diversion of spot LNG cargoes in winters due to load profiling.

It is an untargeted subsidy that primarily benefits the affluent urban population, which constitutes 80% of the demand and incurs a significantly higher cost of service. Expensive spot LNG purchases raise the weighted average price of LNG, a burden yet again borne by the industry.

 

Numerous challenges are faced in this supplying Piped Natural Gas (PNG) to domestic sector which includes limited carrying capacity, gap between connected and contractual load, ageing infrastructure, unplanned spaghetti network, leakages, measurement and billing errors coupled with the practices of gas load shedding and fluctuating demand/load profiles—ranging from daily and weekly variations, notably on Fridays, to monthly and seasonal shifts—further aggravating the gas losses.

Reported reduction in SNGPL’s UFG appears inconsistent with decreasing Bulk to Retail ratio, raising questions about the accuracy of the figures. Ironically, SNGPL’s reported UFG levels have reduced by 50%. Needless to say, this needs to be audited and verified by independent consultants.

Sui companies practicing price discrimination manipulate UFG levels by reallocating losses to lower-priced system gas units shifting them to the RLNG Industrial consumer, which results in increased energy costs for industries, damaging the economy even. Prioritizing the allocation of indigenous gas should first focus on maximizing its economic value addition, particularly considering export industries or to create a National Basket Price including RLNG.

Government-imposed charges and taxes, inefficiencies and UFG on RLNG substantially raise its consumer cost, affecting affordability. At present, cost of transporting LNG from Karachi to Lahore about 1200 km via the LNG Virtual Pipeline is $3/MMBtu and within 200 km is $0.5/MMBtu, while SNGPL and SSGCL RLNG distribution through gas pipelines adds an about $3.3/MMBtu in Delivered Ex-Ship (DES) price, a seemingly inconceivable difference in expense as globally gas pipelines are the most efficient way to transport energy through molecules.

An independent consulting firm is required to report on high RLNG transportation costs and UFG issues, with the aim of rationalizing supply chain expenses and preventing undue additional costs from being passed on to the consumers.

Providing affordable and reliable energy to the industrial sector involves a complex interplay of various disciplines, including economics, politics, geopolitics, institutions, laws, and regulatory framework of a Country. Thus, how we choose to define our energy policies, rules and regulations are of paramount importance for our survival as a state as the world has scarce resources.

Pakistan’s household gas consumption parallels that of the US and European countries, with cross-subsidies, borne by industries, benefiting the rich far more than the poor. Our economy hinges on the rationalization and transparent mechanism of energy pricing. Establishing a Gas Market will address untargeted subsidies, misallocation, and inflated demand in the long-term.

However, for the short term, there’s an urgent need to eliminate gas price anomalies as not only will it be instrumental in promoting exports, it will also be sending right price signals for conservation and optimal utilization of both indigenous and imported fuels in the domestic sector. Attempting to boost exports as envisaged by the Government, while poor governance in energy sector remains, is not achievable.

By Shahid Sattar | Absar Ali

If the economy is to be stabilized, exports can no longer afford to pay for the energy sector’s failures and inefficiencies, and the government’s social obligations.

Power tariffs in Pakistan are amongst the highest in the world (see below), and contrary to all economic norms industry and exports subsidize non-productive sectors of the economy.

Since the withdrawal of regionally competitive energy tariffs in March 2023, over 50 percent of production capacity in the textile sector has remained idle and textile exports have declined from $19.3 billion in FY22 to $16.5 billion in FY23.

Exports for the first two months of FY24, similarly, do not seem encouraging and are down by 13 percent compared to last year while Indian textile exports have posted a 5 percent growth.

Distortions in energy pricing are largely to blame for this. Export sectors were being charged a regionally competitive energy tariff of 9 cents/kWh in FY20. This created a favourable business environment leading to significant fixed capital investments and expansion of export capacity. Between FY20 and FY22, exports increased by 54 percent from $12.5 billion to $19.3 bn.

However, the regionally competitive tariff was withdrawn in March 2023 and the power tariff for industrial consumers now sits at around 15 cents/kWh.

 

An analysis of this tariff shows that of the 15 cents/kWh charged to industrial consumers the actual cost of service is only around Rs 8.2 cents/kWh, while the remaining 6.8 cents/kWhare cross subsidies that the energy sector imposes on exporters to finance its own failures, inefficiencies and to support low tariffs for nonproductive sectors.

Who actually ends up paying for this subsidy to the unproductive sectors is the key to understanding why it cannot be imposed on export sectors.

In the case of industry serving domestic markets, any increase in the price of inputs—including electricity—is passed on to the final consumer and therefore it is the final consumers who pay for it.

However, demand is not very elastic because domestic sectors are largely protected by high tariffs and, among other things, an expensive dollar makes it very expensive to import. So domestic consumers have little choice but to continue consuming domestically produced products at higher prices.

The case of exports, however, exhibits one similarity and one very important difference. Like in non-traded sectors, power costs must be passed on to the consumer.

But, in this instance, the final consumers are international buyers who easily substitute Pakistan’s exports with those of competing firms in regions with considerably lower power tariffs and therefore prices. By virtue of international trade, these consumers are not liable to pay for the inefficiencies that are embedded in prices through the cross-subsidy component of power tariffs, and demand completely vanishes in response to even marginal increases in prices.

 

The implication of this is that trade continues to be diverted away from Pakistani firms towards their regional competitors in countries like Bangladesh, India and Vietnam.

The economy’s exporters and foreign exchange earnings fall as a result, which puts upward pressure on the exchange rate, causing power tariffs to increase further in rupee terms, giving way to a vicious cycle of increasing power tariffs and, decreasing exports, rising unemployment and inflation that our economy is now stuck in.

“The only way to come out of this cycle is to provide exporters with internationally competitive power tariffs.”

Ideally, this should be done through a separate consumer category for exporters, with power tariffs based on actual cost of service and excluding cross subsidies and stranded costs that penalize exports.

However, this would entail a tariff hike of around 0.6 cents/kWh (Rs 2) for other consumer categories, which represents the government’s social liability currently being borne by the exporter sector.

For the long-term, the government must provide exporters with a functional wheeling mechanism to allow B2B contracts for competitively priced electricity.

The wheeling charges should fall within 1-1.5 cents/kWh and exclude any stranded costs, reservation of power charges and cross-subsidies. This will allow the export sector to build up its own power supply without any burden on the government exchequer.

The cap on solar net-metering for industrial consumers should also be raised from 1MW up to 5MW. This will add 5,000MW of solar energy to the point of usage with no upfront investment or guarantees from the government.

Both initiatives will also support the transition towards net-zero energy emissions, which is required to be achieved by 2030 to continue exporting to key Western markets.

None of these are subsidies since they do not involve any transfer from the government to the exporters. A sustainable increase in exports is the only solution to our economic woes, and what is simply needed is that the energy sector stop extorting money from exporters to pay for its own social obligations, failures and inefficiencies.

By Shahid Sattar | Noreen Akhtar

According to the UNEP, 3.3 million tons of plastic waste is produced in Pakistan each year. 250 million tons of garbage consists of plastic bottles, pet bottles and food scraps (WWF).

As Pakistan has the highest percentage of mismanaged plastic waste in the South Asia; consequently, most plastic waste ends up in the landfills, dumping sites and water bodies thus causing serious concerns to the environment and human health.

Pakistan’s Broken Plastic System

One of the major reasons leading to massive plastic mismanagement in Pakistan is that plastic waste is an enormous behavioural challenge. The current behavioral patterns indicate that people prefer plastic products as they are freely available (complementary) but also cheaper.

Moreover, the mentality of people revolves around the idea that pollution management is government’s responsibility, individual efforts are not effective, success means buying more stuff and waste bins are unhygienic to be kept inside the households.

This irresponsible and ill behavioral lifestyle of a vastly growing population indicates a lack of understanding of the long-term consequences of plastic pollution as well as lack of intrinsic motivation to overcome the pollution challenges in the country.

Furthermore, structural ineffectiveness is another critical barrier to the plastic waste management in Pakistan. Regulations and policies such as ban on plastic products are not inclusive (top-bottom approaches) and lose their long-term credibility as they do not explicitly monitor and penalize non-compliances but also do not provide efficient alternatives designed through stakeholder engagement.

Waste producers and litterers including general public are not held accountable for their actions. The current incompetent waste management system adds to the scale of the challenge. The system is not aligned with the circular economy model and lacks waste segregation as well as 6Rs of sustainability (rethink, refuse, reduce, reuse, repair and recycle) solutions.

Pakistan has a largest network of waste pickers who play a crucial role in collecting garbage from around the cities. However, these waste pickers are part of the informal economy and are not integrated to a formal system of waste collection.

This leaves tons of waste collected by these informal waste pickers unmonitored, most of which ends up in the landfills or burning sites, ultimately leaking to the ecosystems. Pakistan’s current plastic system is broken.

It indicates that regulation does not encourage small plastic recycling plants on business sites or waste collection sites. Significantly, plastic producing and consuming businesses and corporates are not held accountable for their plastic polluting value chains.

Background

Plastic has been a ubiquitous commodity in every aspect of human lives due to the increasing industrial-scale adoption in construction, healthcare, domestic materials, packaging, manufacturing and many other sectors.

According to the OECD Global Plastic Outlook, the annual plastic production globally has reached 460 Mt in 2019 compared to 234 Mt in 2000 and plastic waste reached 353 Mt in 2019 compared to 156 Mt in 2000. Out of this proportion, only 9% was recycled, 19% was incinerated while 20% ended up in the sanitary landfills.

The remaining 22% was disposed of in dumpsites, burned in open pits or leaked to the environment. Moreover, mismanaged plastic is the main source of plastic leakage to the environment. For instance, in 2019, around 22Mt of plastic materials were leaked to the environment.

The vast majority includes macro-plastics, most of which cause persistent plastic pollution due to inadequate collection and disposal techniques.

“Consequently, the relentless increase in plastic production and consumption has posed massive persistent risks to the environment and human health by polluting ecosystems due to landfilling, dumping and incineration and open burning. Plastics have a high carbon footprint and emit 3.4% of global GHG emissions. Research indicates that plastic pollution turns soil infertile, contaminates groundwater and heavily disturbs marine life as plastics persist in the aquatic ecosystems for decades and are consumed by marine species.”

Micro-plastics enter human body through inhalation and consumption of contaminated water and food which poses serious health hazards such as endocrine disruption and cancer.

Case studies

Right policy interventions at the right time have successfully curbed plastic pollution to significant levels. The Philippines, for instance, has a Plastic Monitoring Task Force (WMTF), that monitors compliances to the waste management ordinances in the country.

This effective monitoring has penalized and shut down establishments for consistent non-compliances. Australia has a National Plastics Plan (2021), which focuses on strong government-industry partnership to phase out plastics, has set recycling targets for 2025 and focuses on including individuals to reach national plastic reduction targets through information dissemination, consistent curbside collection and container deposit schemes.

Moreover, Mexico’s ample federal, state and municipal regulations along with external investments recovered 50% tons of PET bottles in 2015 to recycle with PET recycling plants.

The rising legal pressure held hotels accountable to comply with the environmental regulations by reducing plastic use to a significant level.

Other groundbreaking government initiatives include ban against all single-use plastics in coastal hotels and restaurants by the Bangladesh’s High Court, plastic-recycling innovation through plastic roads building in India and Extended Producer Responsibility (EPR) programs in the United States to put responsibility of packaging waste on companies.

These EPR programs aim to shift cardboard, plastic containers and non-recyclable packaging recycling and disposal costs to the manufacturers.

By Shahid Sattar | Engr Tahir Basharat Cheema | Asim Riaz

Natural gas is the most important energy source in Pakistan’s energy mix providing 40% of its primary energy supplies for decades. According to the Energy Year Book for 2022, Pakistan’s indigenous gas reserves amount to 19.5 trillion cubic feet (Tcf).

The country’s domestic gas production stood at 3.39 billion cubic feet per day (bcfd), while it imported 1 billion cubic feet per day (bcfd) of LNG (Liquefied Natural Gas) at a cost of USD 4.93 billion during the FY 2022.

The gas sector has ratcheted a whopping PKR 2.9 trillion circular debt as a consequence of mismanagement and many other contributing factors, which include revenue shortfall, subsidies, non-payment, LNG ring-fencing, and diversions, Unaccounted Gas (UFG). This article focuses just on UFG which is one of the main contributing factors.

Surprisingly, the much-maligned Pakistan’s power sector line losses are marginally higher than the global benchmark where the total additional financial impact/loss is around PKR 113 billion (Nepra’s State of Industry Report 2022.) UFG rates, however, shoot up to a staggering 6-7 times higher than international benchmarks with SSGC 15% and SNGPL 8.23% at present (Table 1).

Assuming an LNG import price of USD 10 per unit on a DES basis, and taking into account an average UFG rate of 300 MMCFD over the last five years, the financial loss exceeds USD 1.1 billion per annum, which is 2-3 times higher than line losses in the power sector.

This sum could generate around 2250MW of electricity, PKR 5.67 per kWh at PKR 1050 per MMBtu using indigenous gas, in contrast, the current cost for the same electricity from RLNG-N government power plants is PKR 22.6 per kWh at RLNG price of 4,184 per MMBtu, resulting in a staggering difference of PKR 16.93 per unit in fuel cost, which could have saved PKR 333.56 billion PKR annually. High UFG rates not only erode the revenue of gas, but also become an unprecedented unjustified financial burden on consumers.

UFG is calculated by taking the difference between the metered volume of gas entering the Transmission and Distribution (T&D) network at the point of dispatch or delivery and the metered volume received by end consumers at their metering stations.

It is normally expressed as a percentage by dividing this difference by gas available for sale in a defined time period and system. In financial terms, UFG is the overhead cost in the business of transporting gas, it is lost revenue as it must be added to gas sales to determine the price and total gas requirement.

It is the elephant in the room that nobody talks about that impacts every other issue in the gas sector such as the demand-supply gap, the rising cost of gas, and the import of expensive LNG.

 

The glaring disparity in UFG vs. electricity line loss rate is primarily attributed to technical reasons; this position further underscores the severity of Pakistan’s UFG problem but also begs the following three questions.

1- Why has Pakistan logged consistently high UFG levels — 5-7 times international standards?

2- Why has the problem of UFG in Pakistan persisted with substantial efforts of the two gas companies to reduce it?

3- What should be done to reverse the growth and bring Pakistan’s UFG down towards the international level? How long is it going to take and how much is it going to cost?

1- Contributing factors to UFG

To address the above queries, we need to understand that high UFG in Sui’s network is caused by various factors that are not independent but there exist multiple interactions between them as expounded below.

1.1. Political and governance factors

a) Article 172 of the Constitution, the Government of Pakistan (GoP) owns the gas molecules but State-Owned Entities business is not based on ownership of molecules. GoP also holds a majority stake in SSGC and significant shares in SNGPL but does not actively engage in its role as a shareholder, failing to fulfill its responsibilities. GOP needs to reevaluate the existing tariff regime and put an end to guaranteed rates of return as it results in the extension of a network which is directly related to UFG. Asset expansion should be tied with viability.

b) Gas is used as a political commodity by governments and used to garner votes and goodwill at the elections. However, at present piped natural gas is only available to about 10 million out of 38 million households. The urban population drives 80% of consumption, resulting in an untargeted subsidy ironically presented as a socioeconomic initiative. All other households rely on costly alternative energy sources, including biomass, coal, wood, and LPG.

c) Domestic sector consumption in Suis increased more than 4% from 310 BCF in FY2022 to 323 BCF in FY2023 despite the sharp decline of 7-9% in indigenous gas production.

The cost of gas is tied to dollar indices and crude oil prices, which have increased due to the global energy crisis, this cost escalation, however, has not been passed on to consumers. Previous plans to implement price increases in a staggered or phased manner were not executed mainly due to political reasons.

d) Three-phase A-1 domestic consumers are charged 14,493 PKR per MMBtu for electricity, LPG 5,298 PKR per MMBtu, and RLNG 4,473 whereas the average price for piped natural gas among domestic consumers stands at PKR 380 per MMBtu in SNGPL, PKR 450 per MMBtu in SSGCL.

The bar chart underscores significant price anomalies in energy sources and colossal economic distortion caused by underpricing indigenous natural gas. From the first slab of domestic piped natural gas tariff at PKR 121 per MMBtu to the eleventh tier rate for natural gas supplied to CNG stations at PKR 1800 per MMBtu, natural gas maintains a significant cost advantage over other fuels, acting as an entry barrier.

e) Local populations were not made stakeholders and did not get a fair share which not only contributed to the UFG problem but also created law and order situations. The government has been unable to ensure the security of substantial portions of SSGC’s network, especially in areas like Balochistan and KPK where UFG rates are excessively high.

f) UFG for RLNG is based on SNGPL-provided actual figures which are very high in the distribution network increasing the RLNG price, making it unaffordable for consumers.

Ogra’s introduction of inflexible UFG benchmarks across the country has not only had a financial impact on the gas companies but has diverted top management from efforts to reduce UFG to efforts to modify Ogra’s requirements, resulting in endless and fruitless legal proceedings.

g) The government’s role in appointing managing directors and boards of directors for the gas companies, along with the involvement of courts, NAB, and FIA, has led to high turnover of management and a notable lack of autonomy and professionalism among management.

h) Cathodic protection (CP) stations are vital components across the gas network. These stations facilitate the passage of electric current through pipelines, effectively shielding them from corrosion and various environmental factors. The last two decades of frequent power outages due to power load shedding have deteriorated pipelines increasing the leaks, especially in the distribution main.

i) Workable life is reduced to 50% within certain segments of the gas infrastructure caused by the fluctuating flow rates and pressures due to gas load shedding practices. This is also the leading cause of measurement and billing errors which by estimate is 20% of UFG.

In the light of above, it would not be an overstatement to that the causes of Pakistan’s elevated UFG also lie in Islamabad; both in actions and decisions the government and the regulator have taken and the areas it has neglected.

1.2. Economic factors

There are multiple economic distortions in the gas sector such as price discrimination, subsidies, monopolies, ring-fencing, regulatory barriers, and suboptimal gas infrastructure.

a) Natural gas pricing is not based on the economic principle of scarcity and optimal utilization which resulted in misuse, misallocation, and inflated demand. Government decision to keep the consumer’s prices especially domestic at far below than Ogra’s prescribed price coupled with the Sui business model based on market-based return on assets have resulted in the exponential growth of SNGPL and SSGC Transmission and Distribution Network to an extent where it becomes unmanageable. Management focus shifted from essential network rehabilitation and maintenance to business expansion which generates additional unjustified returns for the companies.

b) Supplying expensive gas at cheaper rates to the residential sector with high UFG and cost of service and expansion of the networks at rapid rates over many years was primarily driven by political rather than consumer mix and economic considerations. The current pricing structure for gas is ineffective and encourages theft, particularly in backward regions of Balochistan and KPK.

c) To meet the demand of domestic consumers in Punjab, RLNG is being diverted towards the domestic sector for 6 months a year. The mismatch between RLNG cost and domestic selling price has resulted in the piling of a huge shortfall and main contributor of RLNG circular debt of approximately PKR 600 billion. Diversion to domestic this winter alone will cost over Rs 200 billion and is a significant portion of gas sector circular debt.

d) Replacing the outdated residential areas gas distribution network is economically not feasible due to decline in indigenous gas production, high capital expenditure and technical challenges in densely populated urban areas. Hence, shifting more natural gas to bulk-use industries can cut costs, reduce UFG, add economic value and improve bulk to retail ratio. (GoP) should establish a target bulk-to-retail ratio of 60:40 for gas supply. Gas supply to bulk-consumers is mainly through dedicated lines designed to operate at high pressures ensuring minimal occurrences of gas leakages and pilferages.

e) Sui companies practicing price discrimination can manipulate UFG figures by attributing losses to lower-priced system gas units and to the LNG user, distorting monetary costs while physical gas losses remain constant. To address this, auditors should ensure transparent measurement, historical analysis, and independent verification of UFG data, a practice that is currently lacking.

More practical approach is to implement Weighted Average Cost of Indigenous Gas (WACOG) for RLNG and indigenous gas with uniform pricing for all consumers. For FY2023-24, Ogra has set uniform pricing at PKR 1,350.68 per MMBtu for SSGCL and PKR 1,238.68 per MMBtu for SNGPL.

If the federal government aligns gas prices according to Ogra’s provisional sale price for Sui’s especially domestic sector, it could lead to more efficient gas consumption by consumers. WACOG framework for RLNG and gas will address price anomalies between indigenous gas and RLNG. It will help rationalise demand and ascertain actual levels of UFG in Suis.

1.3. Institutional causes for UFG

a) An extreme hierarchical structure stifles innovation and the growth of talented individuals. Political and other influence has forced the gas companies to have staffing levels well beyond international norms to provide jobs. A gas company in developed country like Australia similar to SSGC has about 10% of SSGC’s employee numbers, but has a UFG level below 3%.

b) Gas theft is widespread especially in SSGC, with a large number of customers engaging in various forms of theft. Cultural acceptance of theft has evolved over time addressing this issue will be a long-term challenge. Corruption exists at various levels which influences decisions even at higher level of management and impedes efforts to reduce UFG.

c) Power sector’s energy mix is forced to change and sector is moving away from RLNG to other sources such as nuclear, coal and renewables. RLNG will be consumed at distribution in SNGPL where UFG is very high due to leakages, gas theft, measurement, and billing errors. The shift will exacerbate the financial impacts of UFG.

Given the multi-layered and deep-rooted challenges contributing to Pakistan’s high UFG rates it is crucial to approach solutions with a comprehensive understanding of the issue of technically controllable and uncontrollable gas losses.

The consulting firm M/s ICONSULT, engaged by Ogra on October 7, 2021, to audit and ascertain the actual UFG in both indigenous and imported RLNG systems was focused on technical losses.

The government should extend its purview beyond mere auditing and numbers as technical aspects intertwined with the challenges, it will provide an insightful and implementable roadmap that can guide Pakistan’s gas sector a sustainable future.

This is especially significant in current scenario as the long-term contract LNG price will be USD 12 per MMBtu DES price as Brent crude oil has climbed to USD 93 per barrel, oil rises to highest in 2023 driven by expectations of tight supply. Just imagine if 200 MMCFD of gas/RLNG could be retrieved from UFG, this could save Pakistan USD 938 million per annum and also provide cheaper gas to industry for boosting exports.

By Shahid Sattar and Absar Ali

Given rampant sales tax evasion and slowdown in consumer demand, the government is highly unlikely to meet its revenue targets for FY24. This means more government borrowing, higher debt servicing, higher taxes, and an amplification of the current macroeconomic crisis in FY25.

Indirect tax collection, over two-thirds of which comes from sales tax, accounts for between 42.56 and 53.74 percent of government revenue since FY15.

After rising to about 6.7 percent of GDP in FY18, it stagnated around 6 percent and has been on an alarming decline from 6.4 percent of GDP in FY21 to 4.6 percent in FY23 (Figure 1). This is partially driven by a decline in customs duty collection due to varying degrees of import restrictions that have been imposed since FY19. The main determinant, however, is a decline in sales tax collection.

Between FY15 and FY23, GST remained at 17 percent, and federal sales tax collection was resilient at above or close to 4 percent of GDP up to FY21. However, since then it has adopted a downward trend, going from 4.17 percent of GDP in FY21 to 3.78 percent in FY22 and 3.06 percent in FY23.

 

This is explained by two mechanisms. First, since sales tax is a tax on consumption, a demand shock weighs down on sales tax collection. Second is the incidence of tax avoidance, where sales tax collection decreases despite strong consumption.

Overall, household final consumption expenditure as a percentage of GDP was increasing from FY17 onwards but took a hit in FY20 due to the economic impact of Covid-19.

There was a strong rebound from 80.49 percent of GDP in FY20 to 82.49 percent in FY21 and 84.85 percent in FY22 before a decline to 83.43 percent in FY23 because of poor macroeconomic conditions and hikes in the policy rate. However, changes in sales tax collection are not consistent with trends in consumption (Figure 2).

 

While a demand shock caused by macroeconomic deterioration and policy rate hikes can partially explain the decline in sales tax collection in FY23, the broader decline in collection since FY21 is indicative of an increase in the incidence of tax evasion.

Anecdotal evidence suggests the same. For instance, many retailers simply do not use the FBR POS, while for others, their credit card machines mysteriously stop working during the second half of the month. Another example is the boom in new apparel being smuggled in as used clothing to avoid payments of import duties and sales tax.

Sales tax evasion is also not limited to the retail sector. In the cotton ginning industry, for instance, gol-maal has become a common practice, whereby production of cotton bales is heavily underreported, and the difference is sold under the table.

 

However, the main goal here is to avoid paying sales tax on byproducts of cotton seeds that are sold informally but whose sales tax is billed by FBR in proportion to the total production of cotton bales. Similar practices were also recently highlighted in the sugar industry and are prevalent in most sectors.

What does this mean for FY24? The macroeconomic outlook remains poor, and the policy rate can be expected to increase further since inflation is nowhere near subsiding. This will further weigh down on demand and consumption expenditure, which will naturally lower sales tax revenue.

At the same time, tax evasion remains rampant and is likely to increase this year as effective taxation rates, including GST, were increased considerably.

The implications of this go beyond the normal shortfall in government revenue. We have committed a primary fiscal surplus of Rs 401 billion to the IMF.

Total revenue receipts for FY24 are budgeted at 12.16 trillion, of which 3.41 trillion is expected to come from sales tax. If past years are any indication, budget targets are frivolous in any case since they are almost always revised downwards and, even then, go unmet in most years (Figure 3).

Considering the overestimated budget targets, demand-side recession, and increased incidence of tax evasion in tandem, it is highly unlikely that the government will meet its revenue collection targets for FY24. This will mean harsher conditions under the next IMF agreement, more government borrowing which will further add to debt servicing costs, and even more taxes to burden the decreasing share of taxpayers in the next financial year.

Yet there are simple solutions to this. On the retail side, the government must aggressively crack down on tax evasion. The 2022 policy that imposed a fixed income and sales tax on retailers through electricity bills must be revisited, redesigned with a view to widening the tax net, and implemented without remorse.

As of 2022, there were almost 4 million commercial electricity connections in the country, but only about 8,000 retailers integrated with the FBR POS. The remaining can and should be made to pay taxes and become a part of the formal economy.

On the manufacturing side, implementation of the track-and-trace system recently advocated for by the Minister of Commerce has to be a top priority. After the cotton ginning sector, it should be expanded to other sectors where gol-maal is prevalent, and then rapidly rolled out to all sectors of the economy.

Not only will this help clamp down on tax theft in manufacturing sectors, but also promote exports by making supply chains fully transparent and meeting traceability standards of our trading partners. Traceability requirements must also be introduced for high-risk imports, such as used clothing, to clamp down on smuggling.

“Given the growing importance of supply chain transparency in global trade, there is a growing threat that without a track and trace system Pakistan will lose its share in key international markets. So, not only will this help achieve the short-term goal of increasing sales tax collection, but also contribute to a sustained increase in exports that is the only permanent solution to Pakistan’s economic woes.”

By Shahid Sattar and Engr Tahir Basharat Cheema

The power sector has an annual turnover of around Rs 3.3 trillion. Of this, collection stands at around 88 percent, while 12 percent of billing goes unrecovered. Coupled with line losses of around 21 percent—5 percentage points in excess of the 16 percent allowed by Nepra (National Electric Power Regulatory Authority)—we are looking at an annual power sector deficit of at least Rs 500 billion being added to over Rs 2.6 trillion in circular debt each year.

For starters, the government must arrest circular debt growth. This can be achieved in as little as 6 months with efforts on three main fronts.

“First is increasing recovery against receivables. This requires restructuring the Discos’ collection mechanism that is compromised by political and other interest groups at local levels. A specialized agency with a clear time-bound mandate to ensure maximum recovery of new electricity bills as well as previous defaults must be established. It should comprise of independent experts from the power sector and be provided with explicit target-based incentives.”

The second is through recovery against updated consumer security deposits. Currently, security deposits held by the power sector—including all DISCOs—amount to Rs 57 billion, which is only around 17 percent of their total monthly billing. For comparison, security deposits worth three months of billing are held by SNGPL and SSGC in the gas sector.

This number must be immediately brought up to deposits worth one month of billing, which can be collected through electricity bills in 3 to 6 monthly installments. Protected domestic consumers with a monthly consumption of up to 300 units must be exempted from the updated security deposit.

This measure will still provide the power sector with around Rs 250 billion in liquidity. Deposits can be further increased to 1.5 to 2 months of billing for certain high-risk consumers, and mandatorily for defaulters, to collect an additional Rs 200 to Rs 250 billion.

Third is the introduction of prepaid metering. Given the prevalence of nonpayment of electricity bills, all-electric supply—including to government departments—must be channeled through prepaid meters to ensure full bill recovery.

Contrary to common perceptions, prepaid meters are cheap to purchase and install, and can communicate with power distributors through the grid without any additional internet-based connectivity.

In addition to eliminating the need for billing and bill-recovery efforts on the supply side, they also provide the consumer with real-time information on their energy usage, allowing for more effective budgeting and more efficient consumption, and eliminating the potential for overcharging due to erroneous billing.

These measures can provide the power sector with an injection of Rs 300 to Rs 500 billion over the next 180 days without increasing the tariff burden on consumers and create the space necessary to provide economic relief to households, retail, and industrial consumers alike.

Once the power sector deficit has been addressed, the next step would be to embed these measures into a long-term strategy and do away with the circular debt in its entirety.

 

Shahid Sattar and Absar Ali

Before Pakistan can embark on the long and tedious journey of structural reforms, fiscal discipline must be embraced wholeheartedly.

Fiscal discipline refers to the practice of governments maintaining sound financial policies related to government revenue, expenditures, and debt. In the context of Pakistan, fiscal mismanagement by successive governments has resulted in a chronic crisis characterized by low government revenue, high and structurally rigid expenditures, large and persistent fiscal deficits, and mounting public debt that has constrained welfare and development-related spending required for economic growth.

Pakistan has one of the lowest government revenue to GDP ratios in the world (see figure below). The fiscal sector exhibits a high reliance on indirect taxes, which account for between 40 to 50 percent of annual general government revenue since FY15, while more efficient and equitable direct taxes, and non-tax revenue account for 25 to 30 percent each. For comparison, direct taxes account for between 50 to 60 percent of government revenue in India.

Moreover, tax regimes are overly complicated, and rates are high with frequent ad hoc changes, while tax administration and compliance are weak. Over time, these factors have created a culture of tax evasion and broadening the tax net has become a major challenge because of strong incentives for tax avoidance and generally low per capita income levels.

At the same time, government expenditures are at par with other developing and emerging market economies, and high in the context of Pakistan’s overall fiscal position. Several components of current expenditures exhibit structural rigidities that make them difficult to meaningfully curtail.

For instance, given the geopolitical situation and security risks—particularly on the eastern front with India—the government allocates a significant portion of its budget to defense, which accounts for 12 to 14 percent of annual general government expenditures, and 2 to 3 percent of GDP since FY15. In the energy sector, deep-rooted inefficiencies and misaligned policies have built up a circular debt of over Rs. 4 trillion, where different entities owe money to each other, leading to a vicious cycle of growing debt that is increasingly difficult to break.

Discretionary and politically motivated fiscal policies are a major reason for the dire state of the fiscal sector. Pakistan’s fiscal deficit exhibits a strong correlation with the political business cycle (see figure 2). In the lead up to election years, governments — incentivized by electoral gains—increase spending on popular and often short-sighted initiatives and decrease revenue by providing tax breaks to politically favored segments. Low revenue collection and rigid current expenditures mean increased spending must be financed through borrowing. This causes the fiscal deficit to widen and increases debt servicing costs for future governments.

When new governments come in, they are faced with a difficult fiscal situation that requires them to curtail the deficit. Coupled with a vulnerable external sector and frequent external balance shocks, this often requires the help of international financial institutions like the IMF and other bilateral partners. The situation is brought under control through unpopular and ad hoc austerity measures that provide short-term relief but create longer term distortions. Austerity measures are abandoned shortly thereafter, in the same ad hoc manner in which they were first introduced, as the next elections appear on the horizon. And the cycle repeats itself.

Frequent political turmoil and interruptions in the tenures of elected governments also hamper long-term fiscal planning and create an uncertain policy environment that deters foreign investment. These trends have culminated in a situation wherethe government sector is now consuming around 70 percent of domestic banking credit, with annual debt servicing costs for FY24 budgeted at Rs 7.3 trillion — almost 40 percent of budgeted government revenue.

With a significant portion of its population living in poverty, Pakistan needs to spend on social welfare and development programmes to achieve sustainable economic growth. However, fiscal constraints due to low revenue collection, high debt servicing costs and rigid current expenditures have limited the scope of spending on growth-oriented initiatives, which in turn has negative implications for future fiscal sector outlooks.

Moving forward, fiscal discipline must be embraced immediately to create room for growth-oriented spending. This requires setting time-bound targets to rein in fiscal deficits and public debt, and creating fiscal rules that place ceilings on fiscal deficits and public debt and rationalize government revenues and expenditures to ensure long-term and intergenerational debt sustainability.

Fiscal rules must be accompanied by a multipronged overhaul of the tax regime towards a growth-friendly structure, and a shift from reliance on indirect taxes and non-tax revenue towards direct taxes by reducing tax rates and expanding the tax base. Structural reforms in other sectors, such as civil service must be simultaneously pursued to address the structural rigidity of current expenditures.

This will help achieve fiscal sector stabilization, an imperative for long-term economic stability and prosperity, by stimulating economic growth rather than at the expense of an already highly burdened tax base, as is the status quo.

By Shahid Sattar

The economy is headed towards a deep recession. Only a well-targeted fiscal stimulus can avert the incoming crisis. Petroleum prices have increased once again, and further hikes in electricity tariffs are on the table.

The exchange rate continues to face upward pressures, largely due to the release of pent-up demand as import restrictions are withdrawn amid a limited supply of foreign exchange. At the same time, the rise in international fuel prices is expected to continue over the course of this year.

While global food prices have come down from their 2022 peak, they remain elevated at around 2021-levels. All these factors have a high pass-through to inflation, and it is safe to say that inflation is likely to increase further in the near term.

The policy rate, the primary tool to curb inflation, is already at a high of 23 percent, and monetary policy is largely constrained.

The effectiveness of interest rates hikes is also highly questionable at this point since inflation is entirely supply driven, while the mechanism that connects interest rates to inflation is on the demand side. And demand is difficult to curb further since it is already low and relatively inelastic because a large part of household consumption expenditures—especially for the lowest income groups—is being spent on foodstuffs and energy costs, both of which are very basic necessities.

Production in the textiles sector has been down by over 30 percent since March, production capacity in the automobile sector has remained highly underutilized, and business leaders are now warning that over 50 percent of industry across the country is headed towards closure. This has further implications for upstream and downstream sectors such as retail and domestic manufacturing of intermediate inputs, respectively.

Not only are we faced with an increase in prices and erosion of real wages, but also massive joblessness that is placing unbearable pressures on lower- and middle-income groups.

This puts our already struggling economy in an extremely grim position. Amid an already weak and persistently weakening demand, large-scale closure of industry and massive joblessness, and a looming crisis in the financial sector, Pakistan is undoubtedly headed towards a deep recession that will take years to come out of and will cause unimaginable pain and human suffering.

However, there is still time to avert the incoming crisis. The economy needs a stimulus and needs it fast. Yes, fiscal policy is constrained by the IMF SBA, but not to the extent that we have been made to believe. The agreement only prohibits unbudgeted and untargeted subsidies. This means that any stimulating measure will need to be accompanied by a revenue increasing or expenditure decreasing measure.

Since taxes have already been increased considerably in the FY24 budget, revenue increasing measures will only increase the tax burden on already unfairly and highly burdened classes and create further incentives for tax avoidance unless they are imposed on untaxed segments.

The alternative to this is an expenditure decreasing measure, where fiscal space for the stimulus is made by decreasing the government’s current expenditures. The latter is preferable.

The stimulus must also be targeted. The optimal audience is industry—ideally less protected and export-oriented sectors. This will achieve several objectives. First, it will allow firms to resume production, which will address joblessness in both the targeted sectors as well as in upstream and downstream sectors, thus averting the loss of wages.

Second, it will stimulate export creation and relieve pressures on the exchange rate, thereby providing some relief in terms of inflation pass-through. If the stimulus is carefully designed, it will also facilitate the economic adjustment away from protected industries towards productive export sectors reducing the costs of deeper structural reform.

Finally, export earnings will also push up real wages through second- and higher-order effects, providing further relief from inflation.

The final question is of the mode of stimulus. This can take multiple forms such as direct transfers or concessional financing to firms. However, these will have unintended consequences such as an increase in inflation through money supply and are also made complicated by the government’s commitments to the IMF.

The best way to stimulate industry is through the provision of competitive input prices. As we have already argued, exports are collapsing under the power sector’s burden and this effect is spreading to other sectors as well. Provision of cost-of-service tariffs to B3 and B4 export-oriented consumers, that excludes economic inefficiencies like stranded costs, cross-subsidies to lifeline consumers and distribution losses, will provide a large enough stimulus since, for instance, electricity costs account for around 30 to 40 percent of total conversion costs in the textile sector. There is no other option.

By Shahid Sattar and Amna Urooj

However, the initiative faces challenges such as ensuring quality seeds, adopting advanced farming techniques, and addressing water scarcity and pest control. Collaborative efforts between the government, research institutions, and farmers are essential for success. If executed effectively, this cotton revival has the potential to make Pakistan a major player in the global cotton market, strengthening the economy and fostering self-reliance.

In addition to the minimum selling price, the Punjab government has taken further steps to stabilize cotton rates and compensate cotton farmers for their efforts. The successful conclusion of the cotton campaign, which witnessed a significant increase in the sowing of over 4.8 million acres of land, marks a major achievement for Punjab’s agriculture sector.

The projected yield of around 8 million bales of cotton represents a remarkable 170% increase compared to the previous year’s production, indicating the positive impact of the government’s initiatives. By encouraging and assisting cotton farmers during the campaign with timely crop advisories, necessary inputs, and financial support, the government has laid the foundation for a sustainable future for both the textile and agricultural sectors in Pakistan.

Cotton ‘crisis’: challenges, opportunities, and way forward–I

Another opportunity for Pakistan’s cotton sector is the establishment of APTMA Cotton Foundation (ACF). It is a pro-poor initiative aiming to revive the cotton crop industry in Pakistan. APTMA has also formed a Cotton Task Force and seeks international collaborations to enhance seed development technologies and bilateral trade. ACF plans to revolutionize cotton farming by introducing innovative practices, providing technical training to farmers, and improving crop productivity and yield.

The project’s goals include introducing improved and advanced genetically modified seeds, restructuring variety approval systems, and implementing measures for emergency cotton research. By achieving these objectives, ACF aims to alleviate poverty, meet domestic cotton demand, reduce import costs, and boost Pakistan’s export-led economic development.

These concerted efforts not only ensure self-sufficiency in cotton production but also reduce the country’s dependence on costly imports, leading to substantial savings in foreign exchange and bolstering the overall economy.

The cotton crop production assessment for 2023-24 also presents an opportunity for Pakistan’s cotton sector, with positive indicators particularly in Punjab and Sindh. Punjab is close to achieving its proposed target with a 97% progress rate, which could result in a substantial production of 8.09 million bales. Sindh, though at 93% of its target, still expects a production of 3.73 million bales.

KPK and Baluchistan have also shown impressive growth, surpassing their targets by 150% and 138%, respectively. Overall, the total production is estimated to reach 12.41 million bales, indicating a potential boost in the cotton industry for the country. This assessment highlights the possibility of enhanced economic prospects, increased textile production, and improved livelihoods for farmers in Pakistan.

Way forward:

A good cotton crop in Pakistan has the potential to inject substantial money into the rural economy, benefiting the impoverished population the most at the grass root level. Higher yields lead to increased farmer revenues, empowering investments and modernization in agriculture. This success creates more job opportunities, stabilizes wages, and stimulates local businesses, fostering economic growth. Improved incomes enhance educational and healthcare services, laying the foundation for a brighter future in rural communities.

“The success of Punjab’s ambitious cotton revival project hinges on strong collaboration and cooperation between the government, research institutions, and farmers. A cohesive approach that involves all stakeholders is essential to effectively address the challenges faced by the cotton sector and ensure the long-term sustainability of the initiative.”

Research institutions play a crucial role in providing valuable insights and innovative solutions to enhance cotton yields and combat pests effectively. Through collaborative research and development programs, these institutions can contribute to the identification of resilient cotton varieties, advanced farming techniques, and pest management strategies. The government must actively support and fund such research endeavors to equip farmers with the knowledge and tools they need to thrive in a changing agricultural landscape.

To ensure the success of the cotton revival initiative, adequate support, training, and infrastructure are paramount. Farmers need access to modern agricultural practices and technologies that can optimize their cotton cultivation processes. Training programs can empower farmers with the necessary skills and knowledge to implement sustainable farming practices, manage resources efficiently, and improve the quality of their yield.

Additionally, investing in agricultural infrastructure, such as irrigation systems and storage facilities, can help mitigate water scarcity issues and post-harvest losses. The government should prioritize allocating resources and funds to upgrade rural infrastructure and establish a robust support system for cotton farmers, ensuring their success and resilience in the face of challenges.

Continuous monitoring and adjustments are critical to maximizing the impact of the cotton revival initiatives. Regular assessments of the project’s progress, challenges, and outcomes can identify areas for improvement and optimization. Based on these evaluations, necessary adjustments can be made to ensure that the project remains dynamic and responsive to changing circumstances.

The cotton crisis in Pakistan has deeply affected the rural economy, but with the concerted efforts of the government and its projects, there is hope for a brighter future. The urgency to address this crisis and support cotton growers cannot be overstated, as their livelihoods and the stability of the rural economy hang in the balance.


Through sustainable solutions, ongoing support, and continuous monitoring, the cotton revival project has the potential to not only revitalize the rural economy but also contribute significantly to Pakistan’s self-reliance and economic growth. By addressing challenges and fostering collaboration between all stakeholders, the cotton industry can regain its footing and reclaim its status as a major player in the global market. With dedication, perseverance, and innovation, the cotton revival project can be the catalyst for positive change, bringing prosperity and stability to the lives of farmers and the nation as a whole. As Punjab embraces this transformative endeavor, there is optimism that the cotton sector will thrive once again, fostering a more resilient and prosperous future for Pakistan.

APTMA, being a strong advocate of policies that support the growth and development of the sector, is taking pro-poor initiatives to revive the cotton crop, aiming to uplift Pakistan’s economic outlook and benefit future generations. Its strategic alliance with the Punjab government and establishment of Cotton Task Force to revamp cotton production and yield is something to look forward to.

APTMA has also sought seed development technologies, research affiliations etc., through various avenues. It has also established a Cotton Control Room with a team of dedicated researchers and consultants. Their participation in monthly Cotton Crop Assessment Meetings further strengthens their impactful presence as the largest association.

The government-owned research organizations’ abysmal performance has contributed to the decline of the cotton industry, necessitating a reevaluation of their structure. To rectify both the cotton sector’s issues and boost the economy, it is proposed that the responsibility of running cotton-related research centers may be transferred to APTMA. By entrusting APTMA with this task, there is hope for more effective and industry-tailored research, ensuring a stronger future for Pakistan’s cotton industry and overall economic growth.

By Shahid Sattar and Amna Urooj

Stagnation in Pakistan’s rural economy has been ongoing over the last decade for a multitude of reasons. The lackluster performance of cotton has contributed significantly to this.

The cotton sector, which has long been a vital pillar of the country’s rural economy, has faced unprecedented challenges including but not limited to un-approved seeds, substandard pesticides, government apathy etc., leading to adverse effects on the livelihoods of millions of farmers and a larger number of the poorest of the poor women who are seasonally employed for cotton picking.

The cotton industry in Pakistan heavily relies on women cotton pickers working under harsh conditions with low wages, little bargaining power, and facing health hazards. The money earned during the cotton-picking season is steadily dwindling due to cotton crisis and adding to their dismay. This pushes them further into abject poverty, making their situation even more dire.

Apart from the human angle, cotton is more than just a fiber. It is an “and” crop, providing fiber, linters, and seeds without extra resources. Its byproducts are used in various industries, from cattle feed and oil production to paper and food products. Cotton and its associated products account for 10 percent of the country’s gross domestic product (GDP) and contribute 55 percent to its foreign exchange earnings (Abdul Rehman et al., 2019).

As the backbone of Pakistan’s agricultural landscape, cotton cultivation not only provides employment to a significant portion of the rural population (approximately 40%) but also contributes substantially to the country’s export revenue and overall economic development.

The crisis, characterized by flood damages, declining yields, pest infestations, and unstable global cotton prices, has put the country’s rural communities in a state of distress. The once-thriving cotton fields turned into fields of uncertainty, leaving farmers grappling with financial hardships and pushing them further into poverty.

Unlike the United States, where large corporate farmers dominate production, small farmers grow cotton in Pakistan. Small changes in cotton prices or productivity have significant implications for poverty rates in a region that is consistently facing economic doldrums.

A delicate balance exists between cotton productivity and prices, where higher productivity may not necessarily offset the effects of lower prices. A study conducted by researchers from the International Food Policy Research Institute in Benin indicates that reductions in farm-level prices lead to increases in rural poverty (Minot and Daniels, 2002).

The data from Pakistan Bureau of Statistics related to the income inequality in Pakistan shows that urban areas have a higher concentration of wealth in the wealthiest quintile (43.80%) compared to rural areas (15.84%).

As income quintiles rise, average household receipts increase, exacerbating the disparity. In another study data from 480 cotton-growing respondents in Punjab, Pakistan, were analysed and approximately 67 percent of farm households fell below the poverty line when agricultural income was taken into account. This trend is further fortified by the declining cotton productivity as lower incomes are a direct consequence of productivity.

The data shows fluctuations in cotton yield (kg/ha) over several fiscal years, indicating varying agricultural conditions and practices in the cotton industry. These changes impact farmers’ incomes and the overall economic stability of the region.

Due to cotton’s extensive forward and backward linkages, it holds a crucial role in the advancement of the rural sector in the country. The cotton crisis has disrupted this advancement, leading to a chain reaction of economic repercussions across the country.

Challenges

The implementation of an 18% Goods and Services Tax (GST) on Banola, a byproduct of cottonseed, has had a significant impact on the prices of Phutti (cottonseed). As per the price calculations, the reduction in Banola prices from Rs 4,000 per mound to Rs 2,200 per mound resulted in a corresponding drop in Phutti prices from Rs 8,500 per mound to approximately Rs 7,300 per mound. This placed immense financial strain on cotton farmers.

The impact of low cotton rates extends beyond the farmers, rippling through the entire economy.

“With a large percentage of the rural population relying on cotton farming for their livelihoods, the crisis has led to a rise in unemployment and a decline in household incomes. As cotton prices fall, farmers struggle to cover their production costs, leading to increased debts and economic hardships.”

Additionally, the reduced income of cotton farmers affects the purchasing power of the rural communities, dampening consumption and further stalling economic activities in the region. The once-thriving rural markets are now subdued, as the financial burden takes a toll on businesses that rely on the prosperous cotton sector.

Beyond the implementation of the GST on Banola, several other factors are contributing to the decline in Phutti prices. The closure of textile mills due to the removal of competitive energy tariffs has resulted in reduced demand for cotton, leading to oversupply in the market and subsequent price decreases.

High-interest rates have made it financially burdensome for businesses to hold cotton for future consumption, reducing demand and putting downward pressure on Phutti prices. Delayed refunds to the textile industry have also created cash flow constraints for businesses, leading to reduced demand and further affecting Phutti prices.

The high cost associated with maintaining a stock of cotton necessitates a substantial working capital. This means that a significant portion of a business’s funds must be allocated to holding the cotton inventory.

As a result, engaging in large-scale buying is not practical or desirable, which puts downward pressure on the farmers supplying the cotton. The need to allocate a considerable percentage of working capital to inventory limits the buying capacity of cotton buyers, leading to reduced demand and potentially lower prices offered to farmers, impacting their income and economic well-being.

Opportunities

Punjab has embarked on an ambitious plan to revive its cotton industry to lessen the country’s heavy reliance on cotton imports and achieve self-sufficiency in this vital sector. The project aims to reverse the declining cotton production trend by promoting local cultivation and reducing costly imports. This revival can have significant positive effects on the economy, creating jobs, stimulating economic growth, and benefiting supporting industries like textile manufacturing.